Julie Jason: College savings primer

Published 12:21 pm, Friday, September 4, 2015

In some families, parents cover the entire cost of college. In others, the college student pays 100 percent by working his or her way through school and possibly taking out loans. (You have to ask yourself whether this student might have a better appreciation for the educational experience). And then there is the most prevalent method of paying for a college education: the joint effort between parents and students.

According to a national study of college students and parents by Sallie Mae entitled, “How America Pays for College,” parents pay the lion’s share (32 percent of the cost); Thirty percent is covered by scholarships and grants; Sixteen percent is represented by student loans, and 6 percent of the cost is covered via parent borrowing; Eleven percent comes from the student’s own income and savings. Relatives and friends contribute 5 percent. To see the study, go to http:// tinyurl.com/pta3a6u.

A survey recently published by Discover (http://tinyurl.com/plxmz5m) showed that 75 percent of parents are planning to help pay for college, down from 81 percent in 2013; Twenty-one percent are not worried about having enough money to help pay for college; Twenty-nine percent say most of the money required to pay for college will come from student loans.

Just how much will college cost? Lots, if the cost continues to increase faster than the inflation rate.

Fidelity, the financial-services corporation, has a college cost calculator online at http://tinyurl.com/qzsdsck. You insert your child’s age and the type of college he or she will be attending (private, public and so on), how much you’ve already saved and what you intend to save each year. The planner will give you the annual cost and calculate the savings required to reach the amount required for a four-year college stint.

For example, for a 1-year-old, college would begin in 2032 and end in 2036. The calculator provided an annual cost of $35,374 in today’s dollars, based on the national average for a four-year private college.

If you saved $5,000 now, you’d have a shortfall of $349,456, assuming a 5 percent annual inflation rate for the cost of college, a federal income-tax rate of 25 percent and a simulated return based on historical asset class performance.

If you saved an additional $5,000 every year, the shortfall would be $186,241, according to the calculator.

So, what are parents of college-bound children to do? I turned to Mark Kantrowitz for some answers. Kantrowitz is a nationally recognized expert on student financial aid. His website, www.edvisors.com, is a valuable resource for both students and parents and includes tip sheets on student loans, planning for college, making college more affordable, scholarships, filling out the financial aid forms and education tax benefits.

Kantrowitz suggests parents think in threes. Realize that you won’t be paying for college all at once, he explains: “Plan on 1/3 of the cost coming from past savings, another 1/3 coming from current income and the final 1/3 coming from future income from loans.”

“Twisdom” is a funny word, but it has a serious meaning. It’s a short but sweet tweetlike rule of thumb that even the most short-attention-span student will enjoy.

Kari Emerson, my 21-year-old editorial assistant who has great attention to detail, loved these insights. She said, “Twisdoms are easy to wrap my head around, and easy to process and remember (especially compared to the other long, data-intensive resources on college savings that are out there).”

And who can argue with that? Here are some examples:

“It is cheaper to save than to borrow.”

“Save a fifth of your income for the last fifth of your life.”

“Live like a student while you are in school, so you don’t have to live like a student after you graduate.”

“Every dollar you borrow will cost about two dollars by the time you repay the debt.”

“Budget before you borrow.”

“Students who drop out of college are four times more likely to default on their student loans than students who graduate from college.”

Let me add a final thought: How about going to a college that replaces loans with grants? According to Sandra Block of Kiplinger, they are: Yale, Vanderbilt, Davidson, Princeton, Harvard, Amherst, Bowdoin, Pomona, Swarthmore and the University of Pennsylvania. To read Block’s story, “10 Colleges That Don’t Require Student Loans,” go to http://tinyurl.com/nuxx59e.

Julie Jason, author of “The AARP Retirement Survival Guide: How to Make Smart Financial Decisions in Good Times and Bad,” and “Managing Retirement Wealth: An Expert Guide to Personal Portfolio Management in Good Times and Bad,” is principal of Jackson, Grant Investment Advisers Inc. of Stamford. Email her with questions at readers@juliejason.com or write to her c/o The Advocate, 9A Riverbend Drive South, Box 4910, Stamford CT 06907. Copyright 2015 Julie Jason.